220. One of the reasons refinancing has been
successful is for this same reason, that in building a prison
or a hospital the risk is in the early period and therefore you
borrow at higher rates and short, and then you refinance at lower
rates once you have got on to a steady income stream minus the
problem.
(Sir Andrew Turnbull) Yes.

221. But that still has not solved the problem
as far as the customer, the public, is concerned. Let us say 25
years down the line, just so you can tell me how it is coveredwhat
I am getting at is how strong is your contract and is there a
system of penalties and so onsomething happened and half
the building had to be closed down for six months. What is the
public protection?
(Sir Andrew Turnbull) We would not pay the rent.

222. That is not much good, you have not got
anywhere to live, have you? That is not much of a protection.
There should be a penalty. This is what happened with the Passport
Agency. What happened there was that they thought they had the
risk covered, and this came out clearly in the hearing, but in
fact all they had covered was the extra cost to the Government
of taking on the staff, there was no penalty for the inconvenience
or loss to the public, so when there was a loss of 12.5 million
the contract was not even strong enough to stand up to that in
court, and it ended up with the Government paying £10 million
of it and the financier only paying £2.5 million, and he
only agreed that two weeks before he came here because he did
not want to come here saying he had not paid anything. How are
you covered? I am not talking about not paying rent, what protection
have we got for things which go wrong which make a significant
difference?
(Sir Andrew Turnbull) It depends how seriously they
go wrong. If there is a requirement to maintain the temperature
to at least 22º and over a period they fail to do that, there
is a schedule which says what is knocked off if various standards
like that are not met. You are saying, what happens if the thing
becomes unhabitable. I think the answer is that we can terminate
this contract meaning that the future payments we would have made
we do not make.

223. But then you have an unusable building
for a while.
(Sir Andrew Turnbull) Yes, but we also have all that
future rent which we are not going to pay.

224. But there is no penalty clause as such?
(Sir Andrew Turnbull) It is a pretty severe penalty
to them if they have invested in it. They still have the bonds
to service. If we say after 25 years, "Sorry, this is so
unsatisfactory, we are terminating this", that is a pretty
severe penalty.

225. Our problem has been that we have run up
against several risk problems where the public has lost out, and
it is where we are most concernedand I think you can pick
up the pattern of the questioningwhether risk transference
has been as real as you genuinely, obviously, feel it is. This
is a new system, who came up with the idea? Whose idea was it?
Was it yours?
(Sir Andrew Turnbull) To separate out the funding
element?

226. Yes.
(Sir Andrew Turnbull) That was developed in the Treasury
Taskforce which was set up after May 1997. Adrian Montagu was
the guy leading that and Dougie Sutherland. This was a set of
ideas they worked on.

227. It is very ingenious, I am impressed by
it as a concept, but I do not impress my colleagues by saying
that. Can I then take up one final question and go back to Mr
Stewart. I see from your CV that your responsibilities include
the origination and execution of PPP transactions in Europe and
the rest of Europe. Are the rest of Europe ahead of us in any
way in the development of this kind of contract and, if so, in
what way?
(Mr Stewart) There is not a simple answer to that.
The rest of the world and Europe are catching on to this concept.
Some countries are further ahead than others. Probably the furthest
advanced in Europe are the Dutch and the Irish, who have established
a taskforce like the Treasury Taskforce as a centre of excellence
and they are pursing projects. One of the key differences between
the European market and the UK market is that the European markets
tend to be much smaller so that those countries are focusing on
a smaller number of projects which, if you go back, is probably
the case in the UK.

228. Are there any notable lessons we could
learn on project development and safeguards and so on?
(Mr Stewart) They certainly come and talk to a lot
of people in the UK to learn lessons from here and I think there
are lessons for the UK to learn from them. So there is a constant
dialogue going on.

229. Which country would you go to if you wanted
to learn from them?
(Mr Stewart) I would talk to the Irish, who I think
have some interesting ideas. They, for instance, have made great
efforts to involve all the stakeholdersunions and so onin
the process from day one. The jury is still out on whether it
is going to work. I would also talk to the Australians, right
on the other side of the world, who have extensive experience
of these projects and a slightly different approach.

Mr Williams: I think the Public Accounts Committee
had better reconsider its decision not to go to Australia, in
that case. Thank you very much.

Mr Bacon

230. May I first, Sir Andrew, ask you a question
on behalf of Mr Gardiner who had to leave and it is concerning
bank versus bond finance. He asks, "James Stewart just agreed
that because the term was 37 years it was longer than the banks'
longest lending period and therefore the banks could not compete."
He goes on to say, "Earlier you had said there was no factor
which precluded the bank from bidding successfully, in particular
you said you had not set out it must be done by bond finance,
yet in fact the time period meant it had to be done by bond finance,
so effectively the banks were excluded."
(Sir Andrew Turnbull) The banks did not take that
view, otherwise why did they bid. They thought, despite this natural
disadvantage, nevertheless they could come up with something competitive.

231. That was Mr Gardiner's question, perhaps
I can now come on to my own. I would like to return to the question
of the cost of running the Treasury building. You said they would
do the maintenance, the running costs of the building, for £9
million a year, and then I think you sought to correct yourself.
First, I would like to take up something you mentioned earlier
in answer to another question about serviced accommodation. You
said you are buying serviced accommodation which is why you are
paying a different rate. Would I be right in thinking that the
services you are buying are including things like cleaning, window
cleaning, maintenance, security, that sort of thing?
(Sir Andrew Turnbull) All those things.

232. So would it be a correct analogy then if
I borrowed the money to buy a house on a mortgage and Barrett
said to me, "Not only will you get this house for the money
you are giving us but you will get a cleaning lady once a week",
essentially that is a correct analogy is it not? I would not be
paying any extra on top of my mortgage payments, I would be getting
the cleaning lady, it says in the Barrett contract, included
(Sir Andrew Turnbull) I would not expect it to be
for exactly the same price.

233. I am not suggesting for one moment it would
be, but I am asking is the analogy correct.
(Sir Andrew Turnbull) The analogy is correct up to
a point.

234. So if you say you are buying serviced accommodation,
you are paying interest payments on the serviced accommodation.
It is equivalent to my borrowing the money over 25 years, or in
your case 35 years, to pay my cleaning lady, is it not?
(Sir Andrew Turnbull) No, we are not borrowing the
money, they are borrowing the money and then charging us, to pay
for the capital cost. They are also having a current costand
I think the figure given was split between £10.6 million
as the capital cost and £3.4 million as the services.
(Mr Gershon) Can I just add that it is not directly
equivalent because when you buy the house from Barrett, first,
you only get a warranty against defects for ten years, not for
the whole life you are going to live in the house, you get no
warranty from Barrett about keeping up the quality of the interior
decoration, the quality of maintaining the external fabric. It
is different.

235. Yes, I see that. Nonetheless, you are paying
interest payments on it effectively over a 35 year period?
(Sir Andrew Turnbull) No, I do not think we are. We
are paying interest on the money they have had to borrow up-front
to do the work. The £14 million covers the £3.4 million
for services, leaving £10.6 million to pay back the capital.
I do not think we are paying interest

236. The point I was trying to get to earlier
was this, if I have a rubbishy building and it is costing me,
as you said, £9 million a year to keep it going, plainly
one of the reasons it is costing so much money is because it is
falling down, I have to spend a lot on maintenance and so on,
and you yourself said you would have had to spend £50 or
£60 million quite shortly. I would expect, if I spent a sum
of money on doing a building up, that my annual running costs
would go down, not up, because I am then in a position where I
have a brand new, spanking new building which actually does not
fall down. In fact, if it had been cleverly designed like some
modern buildings are, the body heat of the people inside means
the net energy cost of running the building is zero.
(Sir Andrew Turnbull) This would be a BREEAM, a `very
good' rating at least,[5]
so it is designed to be an efficient, low cost building.

237. Can you go back to this question of £9
million, what actually is the running cost per year of the Treasury
building?
(Sir Andrew Turnbull) That was the figure I said I
did not know and I would provide. The £9 million is equivalent
to the £14, not to the £3.4.

238. The point I am trying to get to is this,
Chairman. If you are spreading the cost of this over 35 years,
including the capital costI take it the £14 million
is index linked so it is actually going to be more than £14
million when it comes down to it. That is right, is it not?
(Sir Andrew Turnbull) Yes.

239. My concern is, at the end of the day you
are going to pay a lot more than if you had just gone to a contractor
and said, "Do this building up for us and then we will have
a series of annual maintenance running cost payments which will
be lower because we have a brand new building which is not falling
down."
(Sir Andrew Turnbull) The two things are not comparable.
We would have had the risk of maintaining those standards ourselves.
What we have done is we have a pre-commitment to maintain those
standards, that is written down in the contract, for 35 years.
We have no guarantee, as I said to some hilarity, that we would
actually get the money to do the maintenance. This time we are
sure we have.